During the first 11 months of 2005, Israel exported $14.2 billion of goods to the United States. As strong as that figure appears to be, Israeli businesses can do much more to plan around American state and local taxes, and therefore make their goods more competitive. Every such sale has potential state and local tax consequences for Israeli sellers, American purchasers, or both. These taxes include sales and use taxes (flat taxes imposed on the sale and purchase of goods and services). Unlike federal income tax, state and local sales and use taxes are not covered by the tax treaty between Israel and the United States, and can increase the price paid by a business's customers by as much as 9%. This column addresses tax planning strategies for American sales and use taxes. CONSIDER TWO types of Israeli businesses: Those selling goods by Internet or direct mail so that they lack a physical presence in the states into which they sell, and those having a physical presence through property or a salesperson. The possible existence of such presence must be evaluated on a state-by-state basis. The first type of business, those lacking physical presence in a state, are generally not required to charge sales tax on the goods or services they sell. For that reason, controlling where a seller has its tax presence is a widely practiced form of tax planning. However, if a salesperson, repair person or other representative enters the state for business purposes, the seller can be required to collect sales and use taxes. When this happens, the seller can be liable for taxes that it otherwise would have collected from its customers. The resulting tax liabilities can be quite large. Also, even if a seller does not have a tax presence and is not required to charge sales tax, customers may still be liable for the flat taxes on the transaction. Often the net result is that the tax-included cost to the customer is the same as it would be if the seller had had tax presence. THE SECOND type of business, those having property, employees or other representatives in a state, sometimes request rulings confirming that the sale of their product qualifies for a tax exemption or other favorable tax treatment. This is tax planning by "characterization," and can often be done without identifying the business in question. Planning by characterization can be more effective than tax presence planning because the exemption applies to both the seller and the purchaser. Illinois provides a recent example of this planning technique, as a seller of mastectomy related products received rulings that the items qualified as medical or prosthetic devices and were thus subject to a sharply reduced tax rate. Likewise, in December 2005 New York's tax court ruled that no tax was owed on plastic calling cards that a prepaid calling service provided to its customers, producing a tax savings of $170,000 in just that one state. As another example, in December, the Supreme Court of Missouri held that transmission of telephone calls is a manufacturing activity and that the sale of telephone equipment qualifies for the state's sales tax exemption for manufacturing. Of course, the taxation of goods and services differs by state, and sometimes even within the same state, as demonstrated by the treatment of pre-written computer software. Through March 31, 2006, Massachusetts imposes sales tax on pre-written software delivered to customers on a disc, but not if the same software is delivered electronically. But beginning April 1, all such software will be subject to tax in Massachusetts. Pennsylvania also recently made all sales of pre-written computer software taxable, whatever the method of delivery. The new treatments of pre-written software in Massachusetts and Pennsylvania are not in place across the country, and some states continue to tax software differently depending on mode of delivery. In those states, sellers should be able to reduce the total cost to their customers by making delivery electronically. There are many other types of state and local taxes. Thus, buyers and sellers of land and buildings need to plan for the many real property transfer taxes imposed throughout the country, and all businesses - corporations, partnerships, limited liability companies and trusts - are potentially subject to state and local income taxes and need to plan accordingly. Individuals, too, must carefully plan for state taxes, as shown by a recent ruling which held an Israeli couple to be full-time residents of New York even though their visas limited them to a temporary presence in the US. David A. Fruchtman is an American state and local tax lawyer living in Israel, and can be reached at firstname.lastname@example.org. Leon Harris is an International Tax Partner at Ernst and Young Israel, and can be reached at email@example.com.